COMPETITION AND THE ECONOMIC IMPACT OF THE PROPOSED COMCAST

REPORT OF PROFESSOR SIMON J. WILKIE

COMPETITION AND THE ECONOMIC IMPACT OF THE

PROPOSED COMCAST/NBCU TRANSACTION

August 19, 2010

I. INTRODUCTION

A. Qualifications

1. My name is Simon J. Wilkie. I am the Chairman of, and a Professor

in, the Department of Economics at the University of Southern

California, as well as the Executive Director at the Center for

Communication Law and Policy at the University of Southern

California Law School and a (Courtesy) Professor of Communication.

Prior to joining the faculty at the University of Southern California, I

was a Senior Research Associate in Economics at the California

Institute of Technology. From 1990 to 1994, I held the position of

Member of the Technical Staff at Bell Communications Research,

(Bellcore), the research arm of the Bell Operating Companies. From

2007 through 2009, I sat on the program committee of the

Telecommunications Policy Research Conference (TPRC). I currently

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Report of Prof. Simon J. Wilkie August 19, 2010 MB Dkt. 10-56

serve on the editorial board of the International Journal of

Communication. I have also been an Affiliated Scholar of the Milken

Institute, and a Visiting Assistant Professor of Columbia University.

2. From 2002 to 2003, I served as Chief Economist at the Federal

Communications Commission (“FCC” or “Commission”). In that

capacity, I oversaw the economic analysis performed by the

Commission staff and advised the Chairman and Commissioners on

issues involving economic analysis. Major items before the

Commission during my tenure included the EchoStar/DirecTV

transaction, the Comcast/AT&T Broadband transaction, the Triennial

Review of Unbundling Obligations, and the Biennial Review of Media

Ownership rules.

3. Over the past nineteen years, my academic research has focused on

the areas of mechanism design, regulation, and game theory, with a

particular emphasis on the telecommunications industry. I received a

Bachelor of Commerce degree in Economics from the University of

New South Wales, and M.A. and Ph.D. degrees in Economics from the

University of Rochester.

B. Assignment

4. I have been asked by DISH Network L.L.C. (“DISH”) to review,

from an economic perspective, the additional effects of the proposed

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Comcast/NBCU transaction.1 More specifically, I have been asked to

analyze possible anti-competitive consequences of such a transaction

on the emerging online video distribution methods and Multichannel

Video Programming Distributor (“MVPD”) competitors such as DISH.

Under the structure of the proposed transaction, Comcast will have

clear business incentives that are not aligned with vigorous market

based competition or consumer interests. In addition, Comcast has a

history of punitively limiting the bandwidth of competitive content,

which raises obvious anti-competitive concerns. The acquisition of

NBCU by Comcast would not only increase Comcast’s incentives to act

anti-competitively, but would give it a natural set of content to promote,

further increasing Comcast’s ability to act anti-competitively.

C. Summary of Conclusions

• The nascent market for online video programming distributor services (“OVPD”), including the provision of broadcast and cable content, is rapidly growing and developing.

• Whether OVPD services are complementary to or substitutable for traditional MVPD services, the fact remains that they are both a part of the market for the distribution of video content.

• DISH has begun to aggressively promote Slingbox which is a pro-consumer innovation that allows greater access to consumer’s video content. These innovations are responsive to increasing demand on the part of consumers for alternative

1 This transaction would give Comcast a significant broadcasting services and programming portfolio in addition to its considerable service provision infrastructure and its already existing programming assets. Thus, Comcast will control not just the consumer access point, but also a considerable portion of the content that arrives through that access point.

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access to their choice of video content and highlight the competitive importance in being able to provide such innovations to consumers.

• The merged Comcast/NBCU entity will have strong incentives not only to discriminate in favor of its own programming, but to impede competitors, such as DISH, from providing pro-competitive online video services.

• The incentives for the merged Comcast/NBCU entity to discriminate exist whether online video is a substitute or a complement.

• The nascent nature of this market makes it important for the Commission to take actions to prevent likely anti-competitive effects.

D. Outline of Report

5. Section II explores the current state of online video services and the

relevant market for consideration. Section III discusses and analyzes

the immediate and near-term incentives to discriminate against DISH

and unaffiliated online distributors that would result from the

Comcast/NBCU merger. Section IV explores the role of antitrust and

regulation within these nascent competitive markets. Section V

examines the application of the Commission Staff model to the

Comcast/NBCU merger. Section VI explores the impact of the merger

on pricing, as well Comcast’s dubious claims of efficiencies.

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II. ONLINE VIDEO SERVICES AND THE RELEVANT MARKET2

A. The Growth of Online Video

6. The landscape of MVPD services has changed significantly over the

last decade. Advancements in technology and access to information

continue to bring consumers more targeted and individually-specific

media content. Consumer choice in terms of how and when traditional

television programming is delivered has increased rapidly. In the

home, digital video recorders (“DVRs”) give consumers the ability to

isolate and time-shift traditional MVPD content, but Internet speeds

have increased sufficiently to make watching television online,

ostensibly anytime and anywhere, a viable option for most consumers.

Indeed, widening access to broadband Internet has led many consumers

to question the need for traditional content intermediaries, such as

MVPD service providers unless these providers, too, enrich their classic

linear offerings.

7. The desire to acquire specific content coupled with high speed

Internet access to media makes alternative formats increasingly

attractive to consumers. This past year the FCC Media Bureau Chief

William Lake stated in public that the separation of the TV and the

2 At the highest level, I am distinguishing online video services from traditional MVPD services in the same way that consumers currently do. Namely, whether broadcast and/or cable content is delivered via a broadband Internet subscription. Consumers of online video services, therefore, would include every individual household with access to broadband Internet.

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Internet is “coming to an end” and expressed the general view that the

convergence of broadband and television is approaching.3 This is seen

in the more than 800,000 US households that have moved from

traditional MVPD service to receiving their video programming online

over the last two years, and another 800,000 that are estimated to do the

same in 2010.4 While online video distribution and programming are

rapidly growing and developing, it is considered a nascent market in the

sense that it is still small in comparison to traditional MVPDs and there

is still quite a bit of uncertainty about the future structure of this

market.

B. The Relevant Market

8. Consumers are not primarily concerned with the technology platform

that delivers content to them; they are largely concerned with acquiring

and viewing content. The proliferation of digital television, smart

phones, wireless Internet devices, and laptop computers combined with

increasing access to broadband Internet has hastened the proliferation

of online content as a complementary, and slowly increasingly

competitive, means to access video content. Currently MVPD service

providers compete by offering viewing packages that differ according

3 Eggerton, J. “FCC’s Bill Lake: Time of Separate TV and Net is Ending”, Broadcasting & Cable, (11/18/09). 4 Schonfeld, E. “Estimate: 800,000 U.S. Households Abandoned Their TVs For the Web”, Techcrunch.com, (4/13/10).

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to programming and ubiquity of access modes. Therefore, regardless of

whether online video is currently a substitute or a complement, it is

clear that online video distributors and MVPD are in the same market,

namely the distribution of video content.

9. Currently, there are numerous models for media distribution,

including online broadcaster controlled content (e.g. full length

television episodes offered by NBC.com, CBS.com, etc.), online

content aggregators (e.g. full length episodes and movies offered by

Hulu.com, TV.com, Netflix, etc.), and full service providers who both

aggregate content and provide the distribution infrastructure (e.g.

broadcast and cable offerings of traditional MVPD service providers, as

well as newer products offered by AT&T U-verse, Verizon FiOS,

etc.).5 Taken independently, these models of media distribution will

compete for both consumer and advertising revenues. Online content

providers and aggregators have powerful economic incentives to

cooperate with independent Internet Service Providers (“ISPs”) to

develop substitute online video services platforms to compete with

traditional MVPD services.6 For their part, full service providers, such

as traditional MVPDs like DISH, will have a strong incentive to

5 These categories by no means capture all forms of online video distribution. For example, Sezmi combines online video distribution with an over-the-air tuner. 6 For example, Netflix offers online content delivered by ISPs that can directly compete with broadcast and/or cable content provided by MVPDs. This is true of any website or Internet application offering broadcast and /or cable content.

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collaborate with online content providers or will attempt to directly

provide video content to their subscribers online. As the move towards

multi paths of access to video content continues, these incentives will

only intensify. This is true regardless of how quickly the transition

away from more traditional media delivery formats takes place or

which new type of format establishes itself in the coming years.

10. DISH currently offers its Sling service specifically to address the

growing consumer demand for multi-mode access to video content.

Sling-loaded set-top boxes that allow DISH subscribers to watch their

live television programming anywhere they have access to a computer

with broadband Internet or almost any Smartphone, and more recently

Apple’s iPad.7 These innovations are not only pro-consumer, but

highlight the competitive importance of the Internet and

alternative/complementary modes of access to video content for DISH

and other MVPDs.

III. COMCAST’S POTENTIAL FOR ANTI-COMPETITIVE BEHAVIOR

A. Comcast’s Immediate and Near-Term Incentives To Engage In Anti-Competitive Behavior

11. When firms integrate, their economic incentives can change

dramatically. Firms will often merge when they believe a single

decision making body will align their interests in a way that would be

7 http://www.slingbox.com/

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difficult to achieve through independent negotiations. Therefore, the

merged entity will have different combined incentives than if each firm

were operating independently. The resulting entity would develop

pricing policies, distribution methods, and overall firm strategy in order

to efficiently reposition itself in the market. However, it is not

necessarily the case that the incentives of the merged entity will align

with consumer welfare.

12. Integrated firms, such as the proposed Comcast/NBCU, will enhance

their existing market power as result of their content and infrastructure

control by restricting output (in terms of both content and quality),

raising prices, or both. In the current case, Comcast will have an

incentive to restrict output in such a way as to favor the revenue-

maximizing distribution of its owned content. This favoritism can take

the form of content exclusionary practices, as is addressed by Drs.

Israel and Katz, or more subtle content discrimination through

transmission degradation or even outright blocking.

13. A merged Comcast/NBCU entity will have strong incentives to

discriminate in favor of its own programming regardless of the future or

current structure of the online video content market. This is true

regardless of whether online video is a complement or substitute for

traditional MVPD services. If, as Drs. Israel and Katz would have us

believe, online video programming and MVPD services are, and will

9


continue to be, complements, Comcast/NBCU may not want to

foreclose access of online providers to content entirely, but they will

still have incentives to behave anti-competitively.8

14. It is important to note that if online services are truly complementary

to traditional MVPD services, then important implications must follow.

Namely, the merged entity would control both the pipeline through

which online video is delivered as well as acquire control over a key

complement for any MVPD, NBCU and its online programming. This

will create incentives for Comcast/NBCU to raise prices for those

inputs to its MVPD competitors and to selectively degrade the

transmissions of complementary services of rival MVPD competitors,

such as DISH, or non-affiliated distributors on its infrastructure

network.9 The effects of signal degradation on Direct Broadcast

Satellite (“DBS”) and other competing MVPD platforms, such as the

Slingbox, would cause a direct, adverse horizontal effect.

15. Such an enhancement of market power on the part of Comcast/

NBCU would increase its ability to materially impact its competitors,

8 Several MVPDs, including Comcast, are currently working to position online video services and programming as a complementary service, such as TV Everywhere. This augments, but does not necessarily replace, traditional MVPD services. Clearly, Comcast has an incentive to promote online video programming as a complement that would not replace profit generating MVPD services. Based on this market structure, Israel and Katz argue that Comcast/NBCU would not find it profitable to engage in exclusionary conduct relative to programming content. Israel and Katz focus on only one type of exclusionary conduct, namely the refusal to license NBCU content to competitors in an attempt to thwart the development of online video programming. 9 This could be achieved by discriminatory network management, such as selective capacity allocation.

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and retard the development of online video distribution as a

complementary service of their competitors or as a substitute service of

emerging OVPDs. This could be accomplished not just through

discriminatory price increases and/or signal degradation, but through

delaying new technology or standards. For example, it could be

achieved by not collaborating, or increasing the cost of collaborating,

with other MVPDs or OVPDs on projects similar to Hulu (of which

NBCU currently is a partial owner). Instances of collusion in an

attempt to eliminate nascent competitors are hardly unheard of. For

example, the company Intertainer was a pioneer in the online delivery

of video content.10 In a lawsuit against the studios, it alleged that

Intertainer failed when studios denied it access to their content after

they established a competing platform, Movielink.11 At the time of

Intertainer’s inception, studios had a pecuniary interest in pay-for-view

content distribution, thereby making an online video format

unattractive. If the facts were as alleged, this is a clear example of

vertical control of content leading to foreclosure and a horizontal

competitive harm.

16. While strong consumer preferences towards online video access may

eventually force the development of such services by Comcast/NBCU,

it is likely that post-merger these pro-consumer innovations would be

10 See http://www.intertainer.com/timeline.html11 See http://news.cnet.com/2100-1023-965194.html

11

http://www.intertainer.com/timeline.html

http://news.cnet.com/2100-1023-965194.html


significantly delayed. Firms with significant market power tend to be

adverse to change and the introduction of new technology that

cannibalizes their existing monopoly rents as “the pre-invention

monopoly power acts as a strong disincentive to further innovation.”12

This conclusion also follows quite logically from the very structure of a

monopoly or a market dominated by one or a few firms. A firm with

market power extracts rents precisely because of a lack of substitutes

within a market, allowing for supra-competitive pricing. As Arrow

points out, this means that a monopolist who innovates is “replacing

itself” in the market and so has to forgo its current steam of rents. In

order to innovate, the monopolist must expect to recoup both the cost of

innovation and the forgone rents from the old platform. This threshold

implies that a firm with market power will be less innovative than one

without market power. However, in an oligopoly market with a limited

number of firms, when firms compete as “strategic substitutes” there is

a well known issue that firms may rush to innovate to obtain “first

mover advantage.” A comprehensive survey of the literature is

provided by Baker in 2007.13

12 See Kenneth J. Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in THE RATE AND DIRECTION OF ECONOMIC ACTIVITIES: ECONOMIC AND SOCIAL FACTORS (Richard Nelson, ed. 1962). 13 See Jonathan B. Baker “Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation.” Washington College of Law American University Washington, D.C., available at http://ssrn.com/abstract=962261

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17. In his insightful paper Baker goes on to point out the key role played

by antitrust enforcement in preserving an environment that fosters

innovation. The role of a maverick competitor or a smaller competitor

is key in preserving the incentive of a dominant firm with market power

to innovate. Indeed this is the case in the industry here.

18. In the recent past, the Department of Justice had blocked the

proposed acquisition of a key satellite DBS platform by Primestar, a

consortium of the dominant cable companies. Then, the cable

companies argued that they could use the extra capacity as a

complementary service to existing cable service by offering consumers

more channels than the capacity of their existing analogue cable

systems. As the merger did not go through the dominant cable firms

were now faced with competition from competitors with many new

services that their legacy systems initially could not match. Thus, to

meet the competition from DBS, the cable companies were forced to

innovate and invest in the hybrid fiber coax digital networks that we

have today.

19. This expensive innovation would not have happened but for the

judicious application of antitrust and competition policy. In addition to

the Primestar decision, the FCC’s Program Access Rules played a key

role in the development of the industry. As the dominant incumbents,

the cable companies would have the incentive to get control of essential

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programming, or so called “must see TV,” and deny access to their

competitors. This would foreclose competition and stop innovation.

The Program Access Rules prevented some of this from happening.

20. It is instructive to compare the case of the MVPD market in

Australia, with no program access rules, with the U.S. experience. To

avoid the problem of cable monopoly that occurred in the U.S.,

Australia introduced a duopoly cable structure. As for program access,

however, it was believed that allowing exclusive access to content

would foster innovation and competition. The resulting equilibrium

was that the two cable systems each came to control half the content!

As a result prices in Australia (on a purchasing power basis) are higher

than the U.S. and service is inferior. Although Australia has a similar

economic profile to the U.S. – developed, suburban and English

speaking, as of 2007 it had only a 22% subscription to MVPD service

compared with approximately 87% in the United States. In this case

eventually one firm (Optus) exited the industry and there is now a de-

facto monopoly infrastructure provider.14 The economic cost of this

policy error is enormous. 15

14 Australian Competition and Consumer Commission, Analogue Subscription Television Broadcast Carriage Service: Final Decision, March 2007; FCC, Thirteenth Annual Assessment of the Status of Competition, ¶8 (1/16/09). 15 Since the demise of the cable duopoly policy subscription rates have risen in the last few years to 33% today. (http://www.budde.com.au/Research/Australia-Pay-TV-Statistics- Subscribers-Overview-and-Analysis.html)

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21. In the current case the product market itself is evolving as consumers

can obtain access to their desired video content through alternative

channels such as the Internet and cell phones. As before, this merger

will place control of important content, the NBCU library and ongoing

programming, in the hands of the largest cable company. This imbues

Comcast with the ability to stop innovation by denying competitors

access to this content through alternative and emerging access

platforms, or by hampering such access. If consumers view these

modes of access as complements to their MVPD service, as Katz and

Israel argue, then Comcast will now have the incentive to deny the

customers of its MVPD competitors access to their content of choice, as

this will in turn make Comcast’s MVPD product more appealing to

consumers.

22. In the near term it is probable that OVPDs and MVPD distribution

platforms will become competitors in a single horizontal market. In

this case the merger is imbuing the largest MVPD with a direct ability

to harm horizontal competitors by denying access to key content, or by

increasing the cost of access to key content, and by using signal

degradation to harm competitors.

B. Comcast Has Historically Engaged In Anti-Competitive Behavior

23. Comcast has a history of degrading rivals’ online products. On

August 1, 2008, the FCC formally ruled that Comcast had illegally

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throttled BitTorrent traffic.16 BitTorrent protocol was being utilized by

several companies including Warner Bros., Viacom, PBS, and

Paramount Pictures to distribute online media content. As the general

counsel for Vuze, one of the initiators of the FCC inquiry, put it,

“Comcast is a competitor to all of us who deliver high-quality video

content.”17 Comcast also drew public scrutiny for purposely degrading

signal quality in an attempt to find more economical ways to provide

service.18

24. It has also been suggested that Comcast has selectively applied

recompression to HDTV signals, thereby affecting viewing quality. The

data on this issue as reported by the AVS Forum are reproduced

below.19

16 McCullagh, D. “FCC Formally Rules Comcast’s Throttling of BitTorrent Was Illegal”, CNET News, (8/1/08). 17 McCullagh, D. “BitTorrent Firms: Comcast Throttling Is Anticompetitive”, CNET News, (2/14/08). 18 Williams, C. “Cable TV Under Fire for Degrading HD Quality”, MSNBC.com, (4/21/08). 19 See http://www.avsforum.com/avs-vb/showthread.php?t=1008271

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TABLE 1:

Average bitrates were obtained by comparing the size of each recording, in total bytes, and dividing by the total number of seconds reported by VideoRedo. Multiplied by 8 to convert Mbps

to Mbps.

25. The above table suggests that Comcast, indeed, has the ability to

selectively degrade online video content and has done so in the past.

While this may have been done for legitimate network management

reasons, the post-merger Comcast will be operating with a new and

powerful incentive to favor Comcast-controlled NBCU content over

non-Comcast and non-NBCU content in the online distribution

channels, as well as Comcast MVPD customers over DISH customers.

26. If Comcast were to degrade the quality of the video content

transmitted from the DISH subscribers’ Slingbox to their personal

computers or mobile devices, this would have a material impact on the

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viability of an increasingly important complementary service of a major

horizontal competitor.

27. On a forward-looking basis it would be difficult to monitor such

discriminatory behavior and determine if it was motivated by legitimate

network traffic management concerns. Even if a household were to

successfully detect discriminatory behavior, the costs of seeking

recourse are too high for the household to bear individually.20

IV. THE ROLE OF REGULATION AND ANTITRUST IN NASCENT MARKETS

28. From a regulatory and antitrust perspective, the proposed transaction

would cause a substantial change in the structure of the relevant market

for the distribution of video content. Because of the nascent nature of

online video distribution and programming as a complementary service

and eventually a substitute, this change in market structure would

fundamentally change the course of this market. As a result, the

transaction may affect consumer behavior by not only inflicting harm to

other MVPDs who are attempting to offer complementary online video

services, but by stifling the emergence of online video and foreclosing

online video as a future substitute service.

29. This is a formative era for the restructuring of video markets in light

of watershed technological breakthroughs. Allowing incumbent firms

20 For example, individual households could seek recourse in the form of litigation for punitive or injunctive relief.

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with market power to create substantial barriers to entry by degrading

rivals’ products or raising rivals’ costs likely would have long run

detrimental effects which once the joint venture is in place would be

difficult to undue through regulatory or anti-trust enforcement. Once

the “eggs are scrambled” by the joint venture, regulatory and antitrust

enforcement will only become more difficult.21

30. Comcast’s obvious strategy is to (1) channel the growth and

development of online video distribution toward complementary

product positioning, which will help to protect its current profit margins

by managing any direct competition in the marketplace, (2) restrict

access to the content it controls and/or (3) discriminate against the

content it does not control.

31. Israel and Katz conclude that the nascent nature of online video

distribution and programming means that the Commission should

proceed with great caution, if at all, regarding any structural or

regulatory measures designed to mitigate anti-competitive effects.22 I

disagree. In fact, the nascent nature of the products and corresponding

21 Further, from day one of the transaction, Comcast has majority ownership and makes the decisions for NBCU. It can be expected to use that control to maximize Comcast’s private interests. As a sophisticated conglomerate, GE knows what it is getting into as a minority investor and will be compensated for the sale of control. No regulator should reasonably rely upon Comcast being restrained from acting in its self interest based on a perceived legalistic “duty” to GE, as suggested by Israel and Katz. 22 Israel and Katz place great weight on the current joint venture structure of the proposed Comcast/NBCU transaction. In particular, they use that current ownership structure to argue that it limits Comcast’s incentives to engage in exclusionary conduct.

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markets makes it more—not less—important for the Commission to

take actions to prevent likely anti-competitive effects.

32. Whether online video programming is a complement or substitute to

MVPD services, the merger will cause permanent changes in the

evolution of markets for online video distribution and programming.

This is true especially given that the likely anti-competitive effects have

been a standard practice of a party to the transaction in the past. Once

the transaction has been approved, Comcast’s incentive to continue

with, or even increase, its anti-competitive behavior will certainly not

decrease, and its ability to do so will increase significantly.

V. APPLICATION OF THE COMMISSION STAFF MODEL

33. These conclusions, and my fundamental disagreement with Israel

and Katz, are based on economic rationality, but I note that they are not

inconsistent with the Commission Staff model for several reasons.

First, Israel and Katz readily acknowledge that critical parameters in the

Commission Staff model are highly uncertain. The reliability of these

parameters is the basis for the Israel and Katz conclusion that the

proposed transaction will not harm consumer welfare. One of the chief

parameters in question is their assumption that the extreme position of

complete foreclosure is the best metric to judge the effects of proposed

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transaction on consumer welfare.23 Given this uncertainty, as well as

the nascent nature of the relevant markets, the prudent regulatory and

antitrust policy is for the FCC to take a cautious approach and explore

remedies that would effectively eliminate those albeit uncertain

outcomes that would be harmful to consumer welfare.

34. This is one of many reasons why it is difficult to rely too heavily or

exclusively on the results presented by Israel and Katz based on the

Commission Staff model.

VI. MERGER IMPACT ON PRICING AND EFFICIENCY

A. Impact on Pricing

35. Mixed bundling – selling a bundle of services at a price below the

sum of the prices of the individual service components – “is an

extremely effective means of indirectly price discriminating.”24 Mixed

bundling is also indicative of market power (e.g., as seen in the

bundling practices of Microsoft Office) and is a common strategy in

this industry where “triple play” packages for provision of video, voice

and broadband Internet are prevalent.

36. The merger of NBCU and Comcast must have an impact on pricing.

Consider the price of stand-alone broadband access from Comcast

today. In setting the current price, Comcast balances lost revenues

23 This is true even assuming, arguendo, the basic analysis used by Israel and Katz is correct. 24 R. Preston McAfee “Competitive Solutions: The Strategists Toolkit,” Princeton, 2002, p. 277.

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from higher stand-alone prices (which some consumers will choose not

to buy at the higher price) with the added revenues from customers with

higher-profit bundled services.25 Therefore, at the margin, the post-

merger Comcast entity will have the incentive to raise the price of

stand-alone broadband service absent other competitive pressures.

37. In particular, consider the case of two products, “cable” and

“broadband,” both of which have a marginal cost of zero (this is just a

normalization). Suppose that consumers have a reservation value for

each broadband service, x and cable service, y, with a joint distribution

F(x,y) with density f(x,y). The monopolist optimal mixed bundling

prices ( p* x , p* y p* b) satisfy the condition that for an increase in the

price of broadband, p* x , by ε, it must be that

−Ap* x + Bε +C(p* b − p* x) = 0, where A is the measure of the set of

customers who drop broadband service, B is the measure of those who

remain just with broadband, and C is the measure of the set who switch

to the bundle. Now consider an MVPD broadband provider is

vertically integrated with an advertising supported programming

channel, and obtains an increase in advertising revenues from the

programming entity of δ per video subscriber. The impact of increasing

the price of broadband by ε, then, is:

25 However, post merger, Comcast will now have a higher profit margin on customers who choose the bundle due to the increased number of subscriptions to NBCU channels.

22


−Ap* x + Bε +C(p* b − p* x +δ) =Cδ > 0. Thus, it will be profitable

for the vertically integrated firm to raise price above the optimal price

of the un-integrated firm. The size of this effect depends on C and δ .

Thus the larger the footprint of the MVPD MSO and the larger the

holdings of the programming entity the greater this effect will be.

B. Post Merger Efficiency Claims

38. It should also be noted that Comcast claims that the merger leads to

efficiencies through elimination of “double marginalization” in

programming costs. From these efficiencies, it is claimed, Comcast

will have an incentive to lower MVPD prices to its own customers.

However, the substantial economic evidence contradicts this claim.

There have been 23 econometric studies, as shown in Table 2 in the

Appendix, of how MVPD size affects pricing, and although it is

claimed larger MVPDs have lower programming costs, the record

shows that size does lead to higher prices. Thus there is no evidence

that any such benefit would be passed on to consumers.

VII. CONCLUSION

39. Based on the foregoing analysis, it is clear that the proposed

Comcast/NBCU transaction will provide the post-merger Comcast with

strong incentives and abilities to interfere with horizontal MVPD

competitors, as well as emerging OVPD services, regardless of whether

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online video content is a complement or substitute for traditional

MVPD services.

I declare under penalty of perjury that the foregoing is true and

correct. Executed on August 19, 2010.

Simon J. Wilkie

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TABLE 2

EFFECT OF MSO SIZE ON CABLE PRICES

Study Year of Source

Data Variable for Size of

MSO

Statistical Significance

Level Effect of MSO Size on

Cable Prices

1992 FCC Price Survey

Dummy variable indicating whether the cable system is owned by an MSO

0.05

Ownership of a cable system by an MSO leads to a 7.5% increase in basic cable prices.

FCC (1994)


Number of cable systems owned by the MSO

0.05

Doubling the number of cable systems owned by an MSO leads to a 1% increase in basic cable prices.



0.01

Ownership of a cable system by an MSO leads to a 13% increase in basic cable prices.

Jayaratne (1996)



0.05

Doubling the number of cable systems owned by an MSO leads to a 1% increase in basic cable prices.

1983 Television &

Cable Factbook


Not statistically significant

Doubling the number of cable systems owned by an MSO leads to a 0.8% increase in basic service cable prices. Emmons and

Prager (1997) 1989

Television & Cable

Factbook


0.1

Doubling the number of cable systems owned by an MSO leads to a 2% increase in basic service cable prices.

FCC (1999) 1998 FCC Price Survey


0.1

In 1997, ownership of a cable system by an MSO leads to a 4.1% increase in cable prices.

25




0.2


GAO (2000) 1998 FCC Price Survey

Dummy variable indicating whether the cable system is owned by one of the 10 largestMSOs

0.01

Ownership by one of the 10 largest MSOs leads to a 8.8% increase in cable prices.



0.2




0.2


FCC (2000)


Dummy variable indicating whether the cable system is part of a cluster of

cable systems

0.05

When the cable system is part of a cluster of cable systems owned by an MSO, cable prices are 2.6% higher.

Chipty (2001)

1991 Television &

Cable Factbook

Number of homes passed nationally by

the MSO 0.05

Doubling the number of homes passed nationally by an MSO leads to a 6.7% increase in premium cable prices.


Dummy variable indicating whether a

cable system is owned by an MSO

0.01

Ownership by an MSO leads to a 15.0% increase in cable prices (without cluster dummy).

FCC (2001)




0.01

Ownership by an MSO leads to a 13.7% increase in cable prices (with cluster dummy included).

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Dummy variable indicating whether a cable system is part of a cluster of cable

systems

0.01

When the cable system is part of a cluster of cable systems owned by an MSO, cable prices are 2.4% higher.




0.01 Ownership by an MSO leads to a 22.8% increase in cable prices.

FCC (2002)


Number of nationwide

subscribers served by the MSO

0.01

Doubling the number of subscribers served by the MSO leads to a 1.8% increase in cable prices.



cable system is owned by one of the

10 largest MSOs

0.01


Karakari, Brown, and Abramowitz

(2003)


Dummy variable indicating whether the cable system is

owned by one of the 10 largest MSOs

0.01




cable system is owned by one of the

10 largest MSOs

0.01


Savage and Wirth (2005)

1999 Television &

Cable Factbook

MSO’s share of all cable systems


A 10 percentage point increase in the number of nationwide cable systems owned by an MSO leads to a $1.32 increase in monthly basic service cable prices.

FCC (2006) 2005 FCC Price Survey

Number of nationwide

subscribers served by the MSO

0.01

Doubling the number of subscribers served by the MSO leads to a 2.5% increase in cable prices.

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cable system is owned by an MSO serving at least one million nationwide

subscribers


Ownership by an MSO serving at least one million nationwide subscribers leads to a 1.3% increase in cable prices.

Clements and Brown (2006)



cable system is owned by one of the top 10 largest MSOs

0.01

Ownership by one of the 10 largest MSOs leads to a 6.9% increase in cable

prices.

Chu (2008)

1992-2002 Television &

Cable Factbook

Dummy variable indicating if the cable system is owned by one of the seventeen largest MSOs by subscriber count as of September 2004

0.01

Ownership of a cable system by an MSO leads to reduction in subscriber utility of $2.57 per month.

References: Clements, Michael E. and Stephen M. Brown (2006), “The satellite home viewer improvement act: Price and Quality Impact of Direct Broadcast Satellite Companies’ Provision of Local Broadcast Stations,” Telecommunications Policy, vol. 30, pp. 125–135. Chipty, Tasneem (2001), “Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry,” The American Economic Review, vol. 91, pp. 428-453. Chu, Chenghuan S. (2008), “The Effect of Satellite Entry on Product Quality for Cable Television,” Finance and Economics Discussion Series of the Federal Reserve. Emmons, William M. and Robin A. Prager (1997), “The Effects of Market Structure and Ownership on Prices and Service Offerings in the U.S. Cable Television Industry,” Rand Journal of Economics, vol. 28, pp. 732-750. Federal Communications Commission (1994), “Second Order on Reconsideration, Fourth Report and Order, and Fifth Notice of Proposed Rulemaking,” FCC Record (August) 9, 4119-4310. Report on Cable Industry Prices. May 7, 1999. In the Matter of: Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992 Statistical Report

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on Average Prices for Basic Service, Cable Programming Services, and Equipment. Federal Communications Commission. MM Docket No. 92-266. Report on Cable Industry Prices. June 15, 2000. In the Matter of: Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992 Statistical Report on Average Prices for Basic Service, Cable Programming Services, and Equipment. Federal Communications Commission. MM Docket No. 92-266. Report on Cable Industry Prices. February 14, 2001. In the Matter of: Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992 Statistical Report on Average Prices for Basic Service, Cable Programming Services, and Equipment. Federal Communications Commission. MM Docket No. 92-266. Report on Cable Industry Prices. April 4, 2002. In the Matter of: Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992 Statistical Report on Average Prices for Basic Service, Cable Programming Services, and Equipment. Federal Communications Commission. MM Docket No. 92-266. Report on Cable Industry Prices. December 27, 2006. In the Matter of: Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992 Statistical Report on Average Prices for Basic Service, Cable Programming Services, and Equipment. Federal Communications Commission. MM Docket No. 92-266. Jayaratne, Jith (1996), “A Note on the Implementation of Cable TV Rate Caps,” Review of Industrial Organization, vol. 11, pp. 823-840. Karikari, John Agyei, Stephen M. Brown and Amy D. Abramowitz (2003), “Subscriptions for Direct Broadcast Satellite and Cable Television in the US: An Empirical Analysis,” Information Economics and Policy, vol. 15 pp. 1-15. Savage, Scott J. and Michael Wirth (2005), “Price, Programming, and Potential Competition in U.S. Cable Markets,” Journal of Regulatory Economics, vol. 27, p. 25-46, at p. 41. United States General Accounting Office, “The Effect of Competition from Satellite Providers on Cable Prices,” GAO/RCED-00-164, July 2000. United States General Accounting Office, “Issues in Providing Cable and Satellite Television Services,” GAO-03-130, October 2002. United States General Accounting Office, “Issues Related to Competition and Subscriber Prices in the Cable Television Industry,” GAO-04-8, October 2003. United States General Accounting Office, “Direct Broadcast Satellite Subscribership Has Grown Rapidly, but Varies across Different Types of Market,” GAO-05-257, April 2005.

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ATTACHMENT B

Comcast/NBCU Advertisement Published in COMMUNICATIONS DAILY, July 21, 2010

WEDNESDAY, JULY 21, 2010 COMMUNICATIONS DAILY—3

ATTACHMENT C

Letter from Amy B. Cohen, Vice President and Associate General Counsel, Comcast SportsNet, to Dave Shull, Senior Vice President, Programming,

DISH Network L.L.C., July 23, 2010

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